Problem #4: Kirk & Spock Company borrowed $100,000 from Bank Trust to finance the purchase of fixed (i.e., property, plant, and equipment) assts. The loan contract provides for a 12% annual interest rate and states that the principal must be paid in full in ten years. The debt covenant on the contract requires that Kirk & Spock maintain a current ratio of 1.5:1. Before they borrowed the $100,000, the company's current assets and current liabilities were $130,000 and $80,000 respectively. a. Compute the company's current ratio if it invest $50,000 of the borrowed funds in fixed assts and keeps the rest as cash or short-term investments. To what dollar amount can current liabilities grow before the company violates the debt covenants? Current Ratio: Growth in current liabilities: b. Compute the company's current ratio if it invests $80,000 in fixed assets and keeps the rest as cash or short-term investments. To what dollar amount can current liabilities grow before the c Compute the company's current ratio if it invests $80,000 in fixed assets and keeps the rest as cash or short-term investments. To what dollar amount can current liabilities grow before the company violates the debt covenants? Current Ratio: Growth in current liabilities: c. Compute the company's current ratio if it invests the entire $100,000 of the borrowed funds in fixed assets. To what dollar amount can current liabilities grow before the company violates the debt covenants? Current Ratio: Growth in current liabilities:
Problem #4: Kirk & Spock Company borrowed $100,000 from Bank Trust to finance the purchase of fixed (i.e., property, plant, and equipment) assts. The loan contract provides for a 12% annual interest rate and states that the principal must be paid in full in ten years. The debt covenant on the contract requires that Kirk & Spock maintain a current ratio of 1.5:1. Before they borrowed the $100,000, the company's current assets and current liabilities were $130,000 and $80,000 respectively. a. Compute the company's current ratio if it invest $50,000 of the borrowed funds in fixed assts and keeps the rest as cash or short-term investments. To what dollar amount can current liabilities grow before the company violates the debt covenants? Current Ratio: Growth in current liabilities: b. Compute the company's current ratio if it invests $80,000 in fixed assets and keeps the rest as cash or short-term investments. To what dollar amount can current liabilities grow before the c Compute the company's current ratio if it invests $80,000 in fixed assets and keeps the rest as cash or short-term investments. To what dollar amount can current liabilities grow before the company violates the debt covenants? Current Ratio: Growth in current liabilities: c. Compute the company's current ratio if it invests the entire $100,000 of the borrowed funds in fixed assets. To what dollar amount can current liabilities grow before the company violates the debt covenants? Current Ratio: Growth in current liabilities:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Problem #4:
Kirk & Spock Company borrowed $100,000 from Bank Trust to finance the purchase of fixed (i.e., property,
plant, and equipment) assts. The loan contract provides for a 12% annual interest rate and states that the
principal must be paid in full in ten years. The debt covenant on the contract requires that Kirk & Spock
maintain a current ratio of 1.5:1. Before they borrowed the $100,000, the company's current assets and
current liabilities were $130,000 and $80,000 respectively.
a. Compute the company's current ratio if it invest $50,000 of the borrowed funds in fixed assts and
keeps the rest as cash or short-term investments. To what dollar amount can current liabilities grow
before the company violates the debt covenants?
Current Ratio:
Growth in current liabilities:
b. Compute the company's current ratio if it invests $80,000 in fixed assets and keeps the rest as cash or
short-term investments. To what dollar amount can current liabilities grow before the c Compute the
company's current ratio if it invests $80,000 in fixed assets and keeps the rest as cash or short-term
investments. To what dollar amount can current liabilities grow before the company violates the debt
covenants?
Current Ratio:
Growth in current liabilities:
c. Compute the company's current ratio if it invests the entire $100,000 of the borrowed funds in fixed
assets. To what dollar amount can current liabilities grow before the company violates the debt
covenants?
Current Ratio:
Growth in current liabilities:
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